Spot lumber prices have plummeted 75% from their May 2021 record high of $1,514 per thousand board feet to just $366 this week, roughly matching pre-pandemic levels, according to Random Lengths’ Framing Lumber Composite Price Index. Lumber’s price drop has been particularly dramatic in just the last 90 days in the futures market, with contract prices for July falling 28% to $466 per thousand board feet (futures prices are around $100 above spot prices because of a delivery fee).

Industry experts blame the record drop in U.S. housing affordability and a slowdown in home renovations for quashing lumber demand. It’s just too expensive for consumers to buy new homes or renovate their current ones. That’s led to fewer construction projects and slowing lumber sales. Meanwhile, overly optimistic industry demand forecasts amid hopes for plunging interest rates and rising home sales have led lumber mills to increase supply at the worst possible moment. 

Put it all together and “it’s an ugly scenario” for the lumber market, Ashley Boeckholt, director of lumber and risk management at Sitka Forest Products USA, told Fortune. “We’re kind of having a hangover from a great three years.”

The demand side: A record deterioration in housing affordability and a renovation slowdown

The factors behind lumber’s price moves are varied and complex, but, as always, it all comes down to supply and demand. On the demand side, sky-high home prices and elevated mortgage rates have led to a record drop in U.S. housing affordability over the past few years. The Atlanta Federal Reserve’s Home Ownership Affordability Monitor (HOAM) Index is now at its lowest level since before the Global Financial Crisis of 2008.

As a result, even with an ongoing housing shortage, demand for new homes has remained subdued, leading to similarly weak demand for lumber to build them. “Housing affordability is just really offsides right now,” Dustin Jalbert, a senior economist who leads Fastmarkets’ wood products team, told Fortune. “It's one of the least affordable times to buy a house in decades, and the pool of qualified buyers is starting to kind of dwindle a bit too. So high interest rates eventually do start to bite.”

Weak demand for new homes led homebuilder confidence to drop to a five-month low last month, and housing starts fell 19% from a year ago. Most of that drop was the result of the 52% year-over-year plunge in multifamily housing starts. For a while, steady single-family home starts kept lumber prices from dropping significantly, because single-family homes use more wood than multifamily projects. But now that trend has flipped as well, with single-family housing starts down 2% year over year in May.

What’s more, the critical home-renovation market, which boomed during the pandemic, helping to lift lumber prices, is also showing signs of weakness. Home Depot saw its U.S. comparable sales sink 3.2% in the first quarter, for example. One of the reasons for the drop was “softer engagement in larger discretionary projects…such as kitchen and bath remodels,” Billy Bastek, the retailer’s executive vice president of merchandising, noted on its May earnings call.

Boeckholt, a veteran lumber trader who also hosts the weekly Lumber Word podcast, said he is seeing evidence of declining lumber demand from retail buyers as well. Traders like him are starting to receive “premium” lumber that is typically reserved for the Home Depots and Lowe’s of the world. “That generally means there's pushback” from retail buyers at home goods centers, he noted.

This home-renovation slowdown, when combined with the U.S.’s long-running housing affordability challenges, has led to a serious lack of demand for wood products, particularly when compared to what was forecast just a year ago.

The supply side: A hope-driven ‘bullwhip’ effect

While the demand side of the lumber market is ailing, the supply side may be in an even worse position. After lumber prices surged in 2021 and 2022, the lumber industry responded by investing to increase production. Many lumber veterans saw a long-term opportunity for increased demand for their products because of the housing shortage. And like many Americans, they also anticipated imminent interest rate cuts, which tend to drive more near-term lumber demand.

The only issue with this plan, as Fastmarkets’ Jalbert explained, is that it takes years to create new sawmills and increase lumber supply. This means that a lot of the new lumber supply that was commissioned during the pandemic is just now coming to market—at a time when added supply is the last thing the industry needs. 

“It's a classic bullwhip,” Jalbert noted. “The supply side [responds] in a like manner to demand, and by the time it comes to the market that demand picture is already changed—and in this case in a negative way.”

Boeckholt backed up Jalbert’s argument, saying it’s an example of the “hangover” the lumber market is experiencing after its highly profitable pandemic years led to too much “hope” for more demand. That’s especially true “down in the southern U.S., where there have been mills in a pipeline to build for three or four years that have finally been coming on over the last year,” he said, adding that there was also a lot of investment in older mills to increase production in many regions nationwide.

What to expect from lumber prices through year-end 2024

When it comes to what to expect for the rest of this year, Boeckholt warned that lumber prices may languish near their current, pre-pandemic levels, with the potential for a minor—roughly $50—price increase in the fourth quarter. “There was a lot of hope out there, so when we wash all that hope out—which we will, eventually—that's when we'll bottom,” he said. 

Jalbert also believes lumber prices will likely stagnate through year-end 2024, but in 2025, he argues, things could turn around. Some sawmills will be forced to slow or shut down production due to depressed lumber prices in the second half of this year, lowering lumber supply—“the bullwhip in the opposite direction.” 

That, coupled with interest rate cuts that could stoke lumber demand, will likely lead lumber futures prices to a range between $500 and $600, or slightly above pre-pandemic levels, according to Jalbert. “Supply is going to be cut, and demand will recover,” he said. “But that's going to take time.”